Governance
Who can I sue? |
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| Governance | |
| Written by Tim Edward - partner and head of the commercial dispute resolution team at Maclay Murray & Spens | |
| Tuesday, 21 April 2009 | |
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Property Market: Advisers in the firing line as litigation rises.
As the recession bites, those of us litigators who were around during the 1990s property recession are dusting off our files from that period, as we receive an increasing number of enquiries from those who have lost out in the credit crunch. As asset prices continue to fall and owners and lenders are reluctant to crystallise their losses, it seems likely these enquiries will be the tip of the iceberg. There will undoubtedly come a point where the market bottoms out and where the parties who have lost out take steps in earnest to seek some recovery. A number of the immediate questions will spring to mind. Who can I sue? In any mortgage-backed acquisition of property, there will typically be a number of professional advisers involved. There will be solicitors or estate agents or both. There will be surveyors and valuers, representing the purchaser and the secured lender. In addition, there may be financial advisers or mortgage brokers and if the property is a new build or refurbishment, there may well also be construction professionals, such as engineers or architects. In order to establish a claim against any of these professionals, it is fundamentally necessary to establish a breach of contract or an act of negligence. The most common basis for a claim is the standard test for professional negligence - namely that the professional concerned adopted a course which no competent professional person within the same discipline and area of practice would have adopted if acting with an ordinary degree of skill and care. The first priority is to find a suitably qualified expert in the relevant field to provide an opinion on this. On what basis should I claim? Any claim against a professional usually has a contractual basis, which will mean looking at the terms of engagement provided by the professional, along with any written instructions and determining whether or not there has been a breach of contract. It is worth remembering there is an implied term of contract in most contracts with professional persons that they will at least act within basic standards of competence, skill and care. In some situations, professionals also owe duties to non-clients. For example, a solicitor or valuer representing a lender might also owe obligations to a borrower and vice versa. As well as establishing there has been a breach of contract, it will be necessary to show this has caused some loss. It is a fact of life that mistakes and misjudgements are made by professional people, as by anyone else. Thankfully, the vast majority of these do not result in any loss, either because they are of no material consequence, or because they are capable of being rectified. In order to establish the basis for a claim, it is necessary to show the particular breach or act of negligence directly resulted in some loss to the client, or to another party to whom the professional owed a duty of care. When must I claim and where? The law of prescription and limitation applies to all forms of professional negligence claims. The first question to answer will be which system of law is applicable to the claim. That may depend upon which jurisdiction applies to the claim, though the normal rule is that the applicable jurisdiction for a claim will be the country where the professional person or firm is domiciled or based. It is also possible that standard terms might select a particular jurisdiction and choice of law, but that is also most likely to be the law and jurisdiction of the place where the professional firm is based. As soon as there is awareness of a potential loss arising from a possible act of negligence, legal advice should be taken on prescription and limitation to ensure a claim is preserved. How much can I claim? This issue was the subject of a number of court decisions in the 1990s. The problem was that many lenders and owners were seeking to claim against valuers and other professionals, to recover not just losses referable to a mistake in valuation or other error, but also market losses occurring over the relevant period. Unless the professional adviser has intimately involved himself in the transaction, it is most likely that losses will be capped at the difference between true value and reported value, which could be a lot less than market movement. In relation to valuations, it is also worth noting that there is a “margin for error” or “bracket” within which a valuer can deviate from what is judged (on expert evidence) to be the correct valuation at the time. This margin there can vary from as little as 5% either way in relation to a very standard property to 25% or more in relation to an unusual property. Consequential costs can also usually be claimed as long as they were reasonably foreseeable, for example legal costs involved in sorting out a problem. Is there any limit on this? It has become increasingly common for professional firms to seek to limit their liability in terms of their conditions of engagement. The limitation might be to invoice value, or a multiple of invoice value, or to a particular figure. Any such limitation will have to be established as reasonable in terms of the Unfair Contract Terms legislation. For commercial parties, it is much more likely that such limitations will be seen to be fair and reasonable. There are two other fundamental principles which also limit the ability to recover. In the first place, any claimant must establish that he or she has mitigated their loss or, in other words, taken all reasonable steps to keep the loss to a minimum. If, for example, a lender is claiming for losses arising from a negligent survey or title report, it will be necessary for the lender to establish it has followed all standard procedures, in terms of calling up the loan and selling the property with a view to achieving the best possible recovery. Another important principle is that of contributory negligence. It is possible for a court to restrict liability, even in the event of a successful claim, on the basis that the claimant has contributed to his or her own loss. Following on from the 1990s’ property recession, imprudent lending was a very common basis for a defence of contributory negligence, in respect of claims by secured lenders. This is very likely to be run again, given events of the last few years. If it could be established the claimant lender had failed to carry out property verification checks on the identity and income of the borrower, or had advanced loan funds on an excessive loan to value ratio, then the court would reduce the amount of the award by a percentage to reflect the degree of contributory negligence. How do I fund a claim? This may be the biggest question of all for potential claimants. The first thing to check is whether there is the potential for insurance funding. In the case of individuals, many household policies now provide cover for legal expenses and claims against professional advisers may well be covered by that. For commercial institutions, such as lenders, there may be mortgage indemnity cover in place which, again, might include cover for a claim against professional advisers. In other situations, there might be after-the-event insurance available. There are also now various commercial third party funders, who will potentially invest in litigation. For all such insurers, the critical issue will be whether there are good prospects of success and a legal opinion will be required to support any funding. Such funding will usually involve the lawyers undertaking the claim on a conditional fee basis. In other words, they will only be paid if the claim is successful. It is also important to check that insurance cover will protect against any adverse award of costs if the claim fails. Is there any other way? Pursuing a claim against professional advisers, as with any other type of claim, is to some extent entering unchartered waters. Each claim is different and it is very difficult to assess at the outset whether any particular claim is going to be straightforward to pursue or difficult to pursue. Alternative dispute resolution has, in recent years, become more prominent and insurers are usually open to this, if satisfied that they are facing a potentially valid claim. The possibility for mediation in particular should not be ignored. Mediation necessarily involves some compromise and willingness to make concessions but can result in quick and cost effective settlement of claims. Once again, the important thing to remember is to retain an objective and commercial approach to such claims. Professional indemnity claims can regularly become emotional and heated. People expect high standards from professionals and are disappointed when they are let down. Likewise, professionals feel very strongly about protecting their reputation and integrity. Ultimately, mistakes are made, insurance is there for that purpose and all parties should seek a reasonable commercial outcome, in which those who have sustained a loss are compensated.
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